From Uche Usim, Abuja
The International Monetary Fund (IMF) has raised the red flag over the resumption of petrol subsidy payment, describing it as injurious to the economy.
It reiterated the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor.
In a report produced after a virtual meeting with Nigerian authorities from June 1-8, the IMF also expressed concerns over the ballooning unemployment and inflation rate, though it recognised that real Gross Domestic Product (GDP) was recovering.
The IMF team, led by Ms. Jesmin Rahman, further hailed the Central Bank of Nigeria (CBN) for its efforts at unifying the exchange rate by embracing needed reforms.
The IMF said: “Recent exchange rate measures are encouraging, and further reforms are needed to achieve a fully unified and market-clearing exchange rate.
The resurfacing of fuel subsidies is concerning, particularly in the context of low revenue mobilisation.
“The Nigerian economy has started to gradually recover from the negative effects of the COVID-19 global pandemic. Following sharp output contractions in the second and third quarters, GDP growth turned positive in Q4 2020 and growth reached 0.5 percent (y/y) in Q1 2021, supported by agriculture and services sectors. “Nevertheless, the employment level continues to fall dramatically and, together with other socio-economic indicators, is far below pre-pandemic levels. Inflation slightly decelerated in May but remained elevated at 17.9 percent, owing to high food price inflation. With the recovery in oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued FX shortage.
“The incipient recovery in economic activity is projected to take root and broaden among sectors, with GDP growth expected to reach 2.5 percent in 2021. Inflation is expected to remain elevated in 2021, but likely to decelerate in the second half of the year to reach about 15.5 percent, following the removal of border controls and the elimination of base effects from elevated food price levels”.
The IMF also recognised that tax revenue collections were gradually recovering but noted that with fuel subsidies resurfacing, additional spending for COVID-19 vaccines, and to address security challenges, the fiscal deficit of the Consolidated Government is expected to remain elevated at 5.5 percent of GDP.
“Downside risks to the near-term arise from further deterioration of security conditions, and the still uncertain course of the pandemic both globally and in Nigeria.
“The mission recommended stepping up efforts to strengthen tax administration to mobilise additional revenues and help
address priority spending pressures. “The mission urged the authorities to keep reliance on CBN overdrafts for deficit financing within legal limits, while the government continues to make efforts to strengthen budget planning and public finance management practices to allow for
flexible financing from domestic markets and better integration of cash and debt management”.
On monetary policy, to strengthen the monetary targeting regime, the mission recommended integrating the interbank and debt markets and using central bank or government bills of short maturity as the main liquidity management tool, instead of the cash reserve requirements.
“The banking sector remains liquid and well-capitalised while non-performing loans (NPLs) are contained. The extension of the moratorium on principal payments of qualifying credit facilities on a case-by-case basis through March 2022 should be limited to viable debtors with strong pre-crisis fundamentals. CBN stress tests purport that the banking system would remain adequately capitalised except in case of a severe deterioration of credit quality.
Nevertheless, it remains to be seen what share of forborne loans may turn non-performing as the impact of the pandemic abates. Since NPLs often rise at the later part of the economic crisis, CBN’s strong oversight remains critical to safeguarding financial sector stability”, it added.